The missing piece of the materiality puzzle

Earlier this year, I had quite a lot of fun as a GRI-appointed Quality Control Officer, whose role is to attend GRI training courses as an observer and report back to GRI if certified GRI training is being conducted professionally, competently and in line with GRI standards. This is fascinating for me, mainly because it's so interesting to hear what training delegates ask about and comment on during the course. In one session, a delegate asked the ultimate G4 (now GRI Standards) question - the very same one that I asked GRI Standards leading architect Bastian Buck of GRI, three years back:

Is it OK to write a G4 report with just one material issue? 

The answer of course is Yes and No.

Yes, because technically, if you have determined that your organization has only one material impact, then disclosing this and using GRI to report it does actually tick the box.

No, because, I believe, no organization can be so simple that its impact is entirely mono-dimensional. Even micro-businesses operate across more than one dimension. No business has just one stakeholder.

Behind this ultimate question, then, is the deeper consideration of how organizations define their most material impacts for the purpose of strategy development and reporting. It's not so much about whether you can ride the framework with one material issue; it's about the value you derive from understanding what's material for your business. 

Materiality and Strategy 

One of the positive developments following the introduction of G4 was the elevation of materiality from dormant to active in the minds of companies and reporters. Transitioning to G4 has generally appeared to cause companies to engage in some level of thinking about what's material and how to define it. In some cases, this has been a meaningful exercise where materiality is the result of insightful stakeholder dialogue and the precursor to a multi-year sustainability strategy and basis for reporting. In other cases, we are still seeing the disconnect - where companies have, on the one hand, a sustainability strategy and, on the other hand, a list of material issues that bears no resemblance to the strategy and a report which covers everything except what is deemed material. The next stage in materiality maturity is helping companies to see that this all plays out on the same playground. Sustainability strategy has to be the result of materiality analysis. Materiality can never be in a vacuum.

Materiality and Impacts
Which brings me to another interesting and highly geeky thing I did this week. I listened in on the GRI Global Sustainability Standards Board (GSSB) meeting (for the second time). It's fascinating to be a fly on the wall as the GSSB debates the different aspects of developing GRI Standards. I have to commend GRI and GSSB on full transparency here - all the meeting documents are available and the meeting itself is audio live-streamed (shame about the video!) - and it's a truly illuminating discussion... if you are a reporting geek like me.

One of the topics that came up this time around was the definition of materiality and the clarification of this in the new GRI Standards. GRI maintains that to date, people have "misinterpreted" the definition of materiality, and that the new terminology in GRI Standards makes this much clearer. GRI Standards 100:1.3 states: "Relevant topics, which potentially merit inclusion in the report, are those that can reasonably be considered important for reflecting the organization’s economic, environmental, and social impacts, or influencing the decisions of stakeholders. In this context, ‘impact’ refers to the effect an organization has on the economy, the environment, and/or society (positive or negative)."

In G4, material impacts were defined as follows:

In the GRI 100 Glossary of the GRI Standards, it is now clarified as follows:

A Sustainability Report should therefore report impacts OF the business and ON the decisions of stakeholders. It is not about the impacts of sustainability on the business. The guidance matrix in the GRI Standards remains the same in the GRI Standards is it was in G4 (though the colors have changed a little 😌) (NB: I remind you that a matrix is NOT necessary for GRI Reporting - a list of priority issues is perfectly adequate.)

This the application of this matrix - or specifically, the focus of each of the axes -  has commonly been misused in G4 reporting.

3M's 2016 Sustainability Report, for example, uses reputation on the Y axis and stakeholders on the X axis:

The Fedex 2016 Global Citizenship Report uses stakeholders and business success:

Both these approaches do not reflect the actual intention of the GRI framework. The GRI approach is designed to create a report that reflects impacts on the economy, people and planet. The shape and size of the impact of your specific business is key to defining your positive (or negative) contribution to society. The primary focus in sustainability reporting should be the size and nature of the impacts OF your business and how your business affects our lives. In the GRI Standards, that should now be crystal clear. The outcomes of the way your business addresses mitigating negative impacts or enhancing positive impacts is reflected in your reputation, business success and value creation.

In the conversation at the GSSB, where I was a fly, a concern was raised that some companies have spent fortunes on materiality assessments that include this measure of "importance to business success". "What should they do now?", was the question. Well, it's not the end of the world. There is some overlap. Quite often, these issues will naturally coincide. Almost always, in fact. But in the next review of material impacts, there's an opportunity to better align with the letter and spirit of the reporting standard (and stakeholder expectations).

Which brings me to the more important question: How do you prioritize material impacts?

Materiality and Prioritization

The big weakness in the GRI Standards is the lack of robust guidance for defining the process for prioritizing material impacts. GRI could have been prescriptive in this area. The GRI Standards omit the guidance that was contained in G4 around the stages of defining material impacts: identification, prioritization, validation and review. However, even that guidance did not prescribe a robust process for getting from the universe of many impacts to the fewer most material impacts.  Few companies, if any, actually report this process in a way that help us understand the voices that counted in prioritizing specific impacts.

It's easy enough to define the landscape of relevant issues. But the prioritization has often been reduced to a number-crunching exercise, where different groups give scores to different topics, the numbers are added up and voila - you have a matrix. The outcome of this process can vary widely depending on which voices you count, what weight you give to each voice, how each voice assesses the value of each impact and the weighting factors you use to roll that up into one coherent list of issues. These details are rarely disclosed by companies. The entire basis upon which material impact reporting rests is therefore not transparent and possibly, not robust.

Lloyds Bank publishes a Materiality Report.

The bank describes its process for defining material impacts:

This looks like an invested process. A universe of 50 issues was established. Representatives of six stakeholder groups (including employees as one group) took part in an online survey to rank the issues in order of importance. The online input was supplemented by the opinions of Lloyds external Stakeholder Advisory Group who provided "proxy representation on behalf of some of these groups". The responses were weighted according to "stakeholder group sample and data quality with priority given to direct feedback and Stakeholder Advisory Panel feedback". Then it was all rolled up into a set of 14 issues in 5 categories that appear to have equal priority as the most material impacts.

The issues look to be a reasonable mix of what we might expect a large banking group to prioritize at a general level. But they could also be the issues of any bank anywhere in any country. Trust in business, job creation, access to products and services, customer satisfaction - this tells me nothing about Lloyds Banking Group that is specific to that company. This begs the questions: How detailed was the initial universe of material issues? How was the weighting of stakeholder responses constructed?

Another bank, for example, presents a more company-sector specific picture. Westpac Australia's materiality matrix includes impacts such as positive impact finance, financial capability and empowerment, digital product and service transformation (an issue which is sweeping the banking industry worldwide for obvious reasons) and macroeconomic and demographic trends that are current in the materiality assessment period.

 

Westpac's matrix refers to impacts that are important to stakeholder and important to the business, but, despite this bank's detailed disclosure of stakeholder issues and responses, we are still left in the dark about the process used to assign prioritization to these top 18 material impacts. What influenced the positioning of the dots on this matrix? How were the different stakeholder inputs evaluated?

Next week, I will be presenting the findings of an analysis I performed on behalf of BSI, the UK's national standards body, of sustainability performance and reporting standards that are used predominantly today. The presentation will serve as a basis for dialogue at an event hosted by BSI to consider where standardization or additional focused guidance may assist companies in advancing sustainability performance and reporting. 

If materiality is central to reporting, does the process of defining materiality not merit greater structure and transparency? Good process, good outcome. But what is the process for determining materiality? Every company uses its own logic to develop a process that delivers a result. But if the process is flawed, then the result is flawed. How can we know that companies are reporting the most material issues? If the process is different in every case, the outcomes are not comparable. One of the recommendations I am tabling for discussion next week is that there should be robust process standards for the determination of material impacts. What do you think? I'd welcome your thoughts as we consider this fundamental question that goes to the heart of relevant corporate transparency. The actual event is fully booked with a long waiting list, so if you have a strong view, write to me here or comment on this blog. I am very interested to hear your views.

In the meantime, the good news is that companies are making efforts to define material impacts. Even an imperfect, undisclosed process is a start. As I often say, 80% of something is better than 100% of nothing.

 

elaine cohen, CSR consultant, Sustainability Reporter, HR Professional, Ice Cream Addict. Author of Understanding G4: the Concise Guide to Next Generation Sustainability Reporting  AND  Sustainability Reporting for SMEs: Competitive Advantage Through Transparency AND CSR for HR: A necessary partnership for advancing responsible business practices . Contact me via Twitter (@elainecohen)  or via my business website www.b-yond.biz   (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm).  Need help writing your first / next Sustainability Report? Contact elaine: info@b-yond.biz   

Banking on Smarter Sustainability Reporting

Here I am again in the UK, looking forward to the third annual Smarter Sustainability Reporting Conference (SSR '14) in London next week. We have a fabulous line-up of speakers again this time around, so if you haven't already booked your place, NOW is the opportunity. The conference will take place on  25th February and we will be discussing all things related to the evolution of sustainability reporting with some of the best experts and practitioners around. Check out my posts about presenters from Tiffany & Co, and from The Crown Estate. 

In preparation for the conference, I checked out Lloyds Banking Group's latest report. Lloyds Banking Group is a UK-headquartered financial services group providing banking and financial services to more than 30 million personal and corporate customers through brands including Lloyds TSB, Halifax, Bank of Scotland and Scottish Widows. Lloyds Banking Group has over 92,000 employees.

With the financial services sector being the least trusted industry globally, according to Edelman's 2013 Trust Barometer, and with the UK down in the bottom third of the trust levels in the financial services league table, reporting becomes a critical tool to support business reputation, relationships, customer reach and employee engagement.

Lloyds Banking Group (LBG)'s 2012 Responsible Business Report is structured around the Group's Responsible Business Strategy which was developed in 2011. It focuses on the contribution of LGB to greater prosperity in the UK. That's going to be even more of a challenge these days, following the devastating  flooding in the south of the UK - just this month LBG announced a £250m fund to provide fee free lending for businesses and farmers, as part of a range of measures for businesses and individuals affected by the floods across Britain.

LBG's Responsible Business Strategy is set out in this way:

The priorities for LBG are clear, and the report includes specific performance targets and results for 2012 and new targets for 2013.

I was grateful for the opportunity to ask Caroline McCarthy-Stout,  Head of Strategy & Reporting at LBG, a few questions. Caroline will be presenting on "Innovative ways to outline the progress of your responsible business activities" at SSR '14.

Tell us about your professional background and how you came to be Head of Strategy & Reporting, Lloyds Banking Group. What specific experience prepared you for this role?
Caroline: I’ve worked in the field of sustainability and public affairs for several years. I started my career working in retail, managing the environmental and social management programme for B&Q across their store estate. Prior to leaving to join their parent company Kingfisher in 2005, I headed up a Community Development team and developed an award-winning 5 year Community Regeneration Strategy which, at that time, supported the UK Government agenda. I was also instrumental in producing B&Q’s first CSR report. I then joined Kingfisher to help further develop its international CR activity and build a sustainability-related public affairs function. Prior to leaving Kingfisher early 2012, I was seconded to Business in the Community to help it shape its ‘Visioning the Future – Transforming Business’ programme - this included supporting business company members in picturing, planning and building sustainable business models. I have been involved in a number of networks and forums over the years, including Cambridge University Corporate Leaders Group on Climate Change, and chaired the CSR Experts' Group for the trade association Eurocommerce in Brussels. I was recognised as a Business in the Community ‘Game Changer’ in 2011 – an honour given to individuals who have changed business behaviour and advanced CR within their companies. I joined Lloyds Banking Group to lead Responsible Business (RB) reporting, investor indices and benchmarking work and help with the RB communications strategy. I participate in the RB Committee and have had a lead role in helping to shape the Responsible Business 2020 vision.

What are current your priorities in role? And looking toward the next few years?

Caroline: As part of our 2020 vision, we are launching a ‘Helping Britain Prosper Plan’ focused on the areas where the Group can make the biggest difference and where we can bring about change for the benefit of our customers colleagues and communities across the UK. Our Helping Britain Prosper Plan is simple but ambitious. It sets out seven key commitments and over 20 independently verified ’prosper metrics’ which cover the areas where we can make the biggest difference for our customers across households, businesses and communities. It directly supports our business strategy to be the best bank for customers. People across Britain are facing some big issues - a lack of affordable housing, the challenge of finding a job or escaping the problems associated with being financially excluded, planning for later life and the difficulties of starting or running a successful business in tough times. The Helping Britain Prosper Plan is our response to some of the issues we're best placed to help our customers tackle. Our Commitments include supporting more than 80,000 first time buyers in 2014, lending over £1bn to SME’s on a net basis in 2014, having 40 percent of senior roles filled by women by 2020 and donating at least £100m to the bank’s Foundations between now and 2020. A full set of commitments will be available in our 2013 Responsible Business report. We are the first bank to measure economic and social impact in this way and a big focus for us during 2014 will be to measure and report our progress and to continue to engage our colleagues to deliver against our Plan and bring it to life within our branches and across all brands. 

The reputation of the banking industry in general has suffered over the past few years. How do you view that and how does it affect your work?

Caroline: I think it’s important to say that I would not have joined LBG if I didn’t believe in the leadership commitment to this agenda. There’s a heritage of ‘helping Britain to prosper’ spanning over 300 years and a culture within the business of wanting to do the right thing. We recognise our past mistakes, of course, and know we need to rebuild trust in our business – our Helping Britain Prosper Plan will demonstrate and measure the ways in which we are going to try and achieve this. We must be able to provide meaningful commitments and allow ourselves to be independently measured against those. I believe our Helping Britain Prosper Plan measures can help deliver a positive step-change in regaining positive public sentiment and trust in our industry.

What are the most significant challenges for you in the reporting process? 

Caroline:  Responding to the requirements of all of our many stakeholders and reporting against the things that they expect to hear from us and meeting our regulatory requirements without creating 100 page documents. Integrated reporting takes us a long way but stakeholder demands mean we have to find new, innovative and simple ways to communicate. We have an independent stakeholder panel and work with verifiers to ensure the issues we report upon are reflected in a balanced way.

Who do you expect to be the main audience for your report? 

Caroline: The main audience has traditionally been the investment community. The analysts particularly use the report to profile the business. We've worked hard to ensure our reporting attracts other stakeholders and through our independent stakeholder panel, we’ve been able to get a better insight into what information people want to receive from us. We’ve also undertaken a comprehensive materiality review, and tried hard to find innovative ways of communicating both online and in summary format. 

How do you evaluate the effectiveness of your reporting process? 

Caroline: We evaluate hits on our website and we monitor the feedback we receive. Our stakeholder panel and wider focus groups, undertaken by them, enables us to understand the report’s effectiveness. Our report is also aligned to the Global Reporting Initiative (GRI) framework. Many organisations report on a yearly basis and then put it in the drawer for the next nine months. At Lloyds, the approach is very much a strategic one and the report needs to have multi-purposes as a management tool. For example, bringing our RB report forward in line with the Annual Report and Accounts not only supports an integrated approach, but also enables up to date information and data to be used to support key investment indices such as the Dow Jones Sustainability Index. This whole approach helps us to identify gaps and drive performance. We also believe in the importance of assurance and verification, giving readers the confidence that what is being reported is true and accurate.

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So, interesting perspectives and insights from Caroline. I am looking forward to asking her more questions next week and hope loads of CSR Reporting Blog readers will be there to do the same. In the meantime, thank you to Caroline for sharing thoughts and information to help whet our appetite ahead of the conference. Talking of appetite , wonder if Lloyds have any good ice cream companies among their clients? 

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of Understanding G4: the Concise guide to Next Generation Sustainability Reporting  AND  Sustainability Reporting for SMEs: Competitive Advantage Through Transparency AND CSR for HR: A necessary partnership for advancing responsible business practices . Contact me at www.twitter.com/elainecohen   or via my business website www.b-yond.biz   (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)